Judge David S. Cunningham, Case Number: 23STCV07597, Date: 2024-05-28 Tentative Ruling

Judge: David S. Cunningham, Case: 23STCV07597, Date: 2024-05-28 Tentative Ruling

Moving Party: Farmers Group, Inc. (“FGI”), et al. (collectively “Defendants”)

Defendants’ motion for judgment on the pleadings is denied as to the first affirmative defense, denied as to the second affirmative defense, denied as to the third affirmative defense, and granted with leave to amend as to the fourth affirmative defense.

This case concerns interinsurance exchanges and attorneys-in-fact. The operative complaint alleges:

1. A notable misperception about Defendants is that Defendants are Farmers Insurance and that Farmers Insurance is a profit-oriented insurance company. Both perceptions are inaccurate. Farmers Insurance refers to a group of reciprocal insurance exchanges owned by its members, the policyholders, called subscribers. The subscribers appoint each Defendant as their agent to control and manage their exchanges with a paramount fiduciary duty to act in the best interests of their principles – all subscribers – to deliver insurance at the best possible price. The crux of this complaint is that Defendants act not like fiduciaries but as if they own the insurance exchanges by running the exchanges for their benefit and profit. But neither their history nor their roles absolve Defendants of their fiduciary duty and their actions violate the fiduciary duties they owed all subscribers making up the exchanges.

2. When the subscribers join an exchange and appoint an attorney-in-fact to act in their stead in operating the exchange, the law imposes specific rules to protect the interests of the exchange’s subscribers and ensure the attorney-in-fact abides by its fiduciary duties. These rules include:

b. The attorney-in-fact must fully disclose to the subscribers the basis and method used when compensating itself; and

c. The attorney-in-fact must put the subscribers’ interest ahead of any other interests.

3. The Defendants manage entities called reciprocal insurance exchanges, a unique form of self-insurance.

4. Reciprocal exchanges operate differently than conventional insurance companies, as policyholders, referred to as subscribers, are both the owners and the insureds. Reciprocal exchanges are unincorporated associations of subscribers owned by all subscribers.

5. Because exchanges lack a separate legal identity, the subscribers appoint an attorney-in-fact, which can be a corporation, to act as their agent and manage the exchange for their benefit.

6. Other key differences distinguish reciprocal exchanges from conventional insurers. Exchanges are not profit-seeking entities. They exist to provide insurance to fellow subscribers on the best possible terms, which includes keeping the cost of coverage as low as possible. Also, as the owners, all subscribers have property interests in their exchange, including its surplus and excess premiums. (Corp. Code, § 18100 [“interest of a member in an unincorporated association is personal property”].) If an exchange’s excess premiums or surpluses are greater than needed, the association can return funds collected to the subscribers, thus effectively reducing the subscribers’ cost of insurance. (Ins. Code, § 1420.)

7. Plaintiffs are subscribers in at least one of three reciprocal exchanges organized under the California Insurance Code and doing business under the Farmers® brand: Farmers Insurance Exchange, Fire Insurance Exchange, and Truck Insurance Exchange (collectively, the Exchanges).

8. Defendants were formed with the Exchanges to act as attorneys-in-fact. Specifically, [FGI] serves as the attorney-in-fact for subscribers of the Farmers Insurance Exchange. Two of FGI’s subsidiary companies, Fire Underwriters Association and Truck Underwriters Association, are the attorneys-in-fact for subscribers of the Fire Insurance Exchange and Truck Insurance Exchange, respectively.

9. The Defendants required the subscribers to appoint them as their attorneys-in-fact through a standardized power of attorney in form documents called a subscription agreement. FGI drafted and requires all subscribers to agree to these form subscription agreements as part of the process of procuring or renewing their insurance policies.

10. As attorneys-in-fact, Defendants act as trustees and owe fiduciary duties to subscribers that impose strict duties of loyalty and care that lie at the heart of this lawsuit. Inasmuch, Defendants are responsible for managing the subscribers’ Exchanges solely in the best interests of the subscribers, with the aim of providing insurance at the most favorable terms possible.

11. Despite being for-profit entities, Defendant attorneys-in-fact have no ownership stake in the subscribers’ Exchanges that would entitle them to part of the Exchanges’ surplus or excess premiums. The only compensation Defendants can receive is for the services they provide as a direct result of Defendants’ pursuit of the best interests of the subscribers, and it cannot be excessive. Defendants’ fiduciary responsibilities prohibit them from exploiting their positions of trust for their own financial gain at the expense of the Plaintiffs and all subscribers.

12. Defendants’ responsibility to adhere to strict fiduciary duties, and Plaintiffs’ and the subscribers’ rights to demand compliance to protect their ownership interests by enforcing those fiduciary duties if breached, present another key difference between the Exchanges and conventional for-profit insurers.

13. Enforcement of Defendants’ fiduciary obligations is critical to this unique relationship because although a reciprocal exchange model offers substantial advantages to its owners, it can also present significant opportunities for abuse by the attorney-in-fact.

14. As Professor Reinmuth explains, the attorney-in-fact’s position of management and control, including control over setting its own compensation, gives rise to a danger that unscrupulous attorneys-in-fact can shift subscriber premiums away from the exchanges’ accounts and surplus to themselves, exploiting their fiduciary position “to create a private profit insurer . . . with the appearance of a mutual organization.” Dennis F. Reinmuth, THE REGULATION OF RECIPROCAL INSURANCE EXCHANGES 12-13, 145 (1967).

15. Attorneys-in-fact like Defendants can exploit the relationship with subscribers unnoticed because they set their own compensation, which is not regulated by the insurance commissioner. Defendants state that the compensation terms in the subscription agreements have been in effect since 1943. Under California law, the “[p]ayment or waiver of fees or other amounts due under subscription agreements or powers-of-attorney forms that were in use before 1943 and that have not been amended in any way to modify payments, fees, or waiver of fees, or otherwise substantially amended after 1943 shall not be subject to regulation,” by the insurance commissioner. (Ins. Code § 1215.5, subd. (b)(4); see also Fogel v. Farmers Group, Inc. (2008) 160 Cal.App.4th 1403, 1417 & fn. 10 [insurance regulator does not “examine or regulate an attorneyin-fact’s expected profit or rate of return,” and it “does not determine whether the amounts the attorneys-in-fact collect are consistent with the fiduciary duty they owe to subscribers.”].) The subscribers’ sole remedy for an attorney-in-fact’s abuse of the attorney-in-fact relationship is enforcing the attorney-in-fact’s fiduciary obligations under the law.

16. Defendants have done just what Professor Reinmuth warned of and violated their fiduciary obligations. Plaintiffs bring this action to address Defendants’ breaches of fiduciary duties, which include:

a. Taking excessive compensation, with Defendants’ profits exceeding 100% of their expenses even though the profits of other companies who do more are approximately 20%, rarely over 30%, and never approach 100% of the expenses incurred;

b. Obtaining subscribers’ agreement for compensation terms, such as 20% or 25% of premiums, that Defendants know are excessive and unsustainable, and that Defendants know would put the Exchanges in financial peril if they enforced these terms;

c. Amending the compensation terms in the subscription agreements without the subscribers’ authorization or knowledge and without providing the insurance commissioner with prior notice and the opportunity to disapprove the amended management fees prior to collecting the fees, as required by California law; and

d. Failing to disclose to subscribers the method for calculating the attorney-in-fact fees Defendants do collect, including that Defendants have agreed upon a new compensation formula guaranteeing them reimbursement of all their attorney-infact expenses plus risk-free profits of up to 7% of the subscribers’ premiums— while also shifting billions of dollars in expenses onto the Exchanges—to pay themselves yearly profits exceeding $1 billion and 100% of their attorney-in-fact expenses.

17. Defendants are entitled to fair compensation, but here Defendants took a different approach: Defendants identified the maximum profit that could be taken without financially impairing the Exchanges and then awarded that to themselves so they could transfer billions of dollars to their parent corporation.

18. Defendants improperly siphon nearly all excess premiums out of the subscribers’ Exchanges and funnel it to FGI’s parent company, insurance giant Zurich Insurance Group Ltd. (“Zurich”), to benefit Zurich and its shareholders, thus taking money that, had Defendants adhered to their fiduciary duties, should have benefited all subscribers and their Exchanges.

19. Defendants violate their fiduciary duties from the start when they require Plaintiffs and subscribers to sign subscription agreements having attorney-in-fact fees of a fixed 20% of gross premiums (25% for Fire Insurance Exchange subscribers), plus membership fees, that Defendants know they could not enforce lest they render the Exchanges insolvent. But Defendants require all subscribers to agree to these excessive terms to evade regulation because, if they formally amended the terms to insert reasonable fees, they would have to provide the insurance commissioner prior notice of the amended terms and the opportunity to disapprove. Defendants also use these subscription agreements as a ruse to appear “reasonable” in the fees they do charge that, like the amounts in the subscriber agreements, are wildly excessive and untethered to the services Defendants provide.

20. Specifically, Defendants do not collect the unenforceable fixed-percentage attorneyin-fact fees in the subscription agreements and collect a different amount that varies each year and that Defendants alone set. Nothing in FGI’s subscription agreements gives Defendants the authority to depart from the subscription agreements and set its fees at amounts it determines.

21. Defendants violate their fiduciary duties by taking the unauthorized attorney-in-fact fees they set, which are excessive by any standard. Defendants have all subscribers pay them riskfree profits that exceed 100% of Defendants’ actual cost of managing the Exchanges. Even among for-profit insurers, taking profits that equal or exceed 100% of expenses is rare, if not unheard of.

22. For example, Plaintiffs estimate that for 2021 the Defendants’ attorney-in-fact expenses were $1.224 billion, and Defendants charged subscribers that amount plus an additional $1.263 billion in attorney-in-fact “fees” that was pure profit. Plaintiffs estimate that for 2020 the Defendants’ attorney-in-fact expenses were $1.051 billion and the Defendants extracted an additional $1.135 billion in attorney-in-fact “fees” that was pure profit.

23. Defendants’ 100% plus surcharge on the services they render to the Exchanges is excessive and not in the best interests of subscribers. For example, even where the attorney-in-fact bears nearly all expenses of managing the exchange, the percentage of expenses the attorneys-infact typically take as profit from the subscribers’ gross premiums is approximately 20%, rarely over 30%, and never approaches 100%, of the expenses incurred.

24. But here Defendants do not even bear most expenses because they have shifted them onto the Exchanges. The subscribers must pay over $2 billion in expenses to manage the Exchanges, plus pay claims owed, in addition to the over $2 billion Defendants extract as their management fees.

25. Thus, Defendants take a profit as if they owned the Exchanges as for-profit insurers, and as if they owed no fiduciary duties to subscribers, despite not having the same responsibilities or risks as an owner of a for-profit insurer. The Defendants have no ownership interest in the subscribers’ Exchanges, do not bear all expenses, and do not bear the risk of paying claims.

26. Further, Defendants’ parent, Zurich, disclosed in 2020 that Defendants have an “agreed upon” attorney-in-fact compensation formula to reimburse their attorney-in-fact expenses plus a risk-free profit of up 7% of the subscribers’ gross premiums. Defendants, however, never disclosed this amended attorney-in-fact compensation formula to Plaintiffs and subscribers; Plaintiffs and subscribers never authorized this amended compensation formula; and the Exchanges’ boards of governors have no authority to amend the subscription agreements. Further, upon information and belief, the California Insurance Commissioner was never provided prior notice of this amended attorney-in-fact fee formula and the opportunity to disapprove it before the Defendants entered into the agreement and collected their fees, as required by California law.

27. The Defendants’ fiduciary duties to act in the subscribers’ best interests prohibit them from acting as if they own the Exchanges they manage. Defendants do not have the right to take surplus funds—the excess of the premiums collected from the subscribers over the amount needed to pay for claims and administrative expenses—from the Exchanges, either for their own benefit or the benefit of third parties such as Zurich, to the disadvantage of the Exchanges’ owners. Defendants pretending to be an attorney-in-fact serving the interests of the subscribers while acting as a for-profit insurer allows Defendants to dodge the risks associated with a for-profit relationship, such as paying claims, all while not being regulated or supervised as for-profit insurance companies are.

28. Whether the unauthorized and illegal attorney-in-fact fees Defendants collect are determined based on a percentage of surplus generated, an hourly rate considering skill, tasks, and circumstances, or a flat fee, the conclusion remains the same: The unauthorized and illegal fee is excessive and not tethered to the services Defendants provide.

29. Defendants’ repeated breaches of fiduciary duty have caused significant harm to the subscribers, including Plaintiffs, and their Exchanges, including one or more of the following: less capital available for dividend payments or strengthening reserves, reduced financial stability, increased requirements for subscriber capital contributions, diminished ratings, loss of regulatory safeguards, and the departure of subscribers due to the Defendants' self-enrichment. This is especially prominent once the extent and visibility of these actions are determined.

30. Because the Defendants’ billions of dollars in excessive fees drain the excess premiums out of the subscribers’ Exchanges, the Exchanges consistently report negative net income and a surplus sustained only through costly loans that transfer hundreds of millions of dollars to Defendants’ affiliates. This disparity between the profits of the subscribers’ Exchanges and the Defendants further evidences the unreasonable and excessive compensation Defendants pay themselves.

31. As a result of their fiduciary violations, FGI transfers over $1.2 billion annually out of the Exchanges’ (subscribers’) excess premiums to its parent company, Zurich, leaving the Exchanges with only enough cash left to pay on average less than $1 million annually to all subscribers, the owners. In comparison, a similar reciprocal organization, not managed by Defendants, returned funds to its subscribers ranging from $1.1 billion to $1.5 billion annually and reported net income in the tens or hundreds of millions of dollars.

32. The Defendants’ mismanagement, especially financial mismanagement, directly affects all subscribers by diminishing the financial strength of the Exchanges, including driving negative ratings for the Exchanges. Moody’s Investor Service states that, “FGI collects considerable management fees from Farmers, making this operation valuable to Zurich but somewhat limiting Farmers’ ability to generate capital. The negative rating outlook reflects Farmers’ weak profitability and persistently high operational and financial leverage relative to peers.” (Moody’s Investor Service, Rating Action: Moody’s affirms Farmers Insurance Group's ratings; outlook remains negative (December 14, 2020).) It is valuable to Zurich solely because of the Defendants’ illegal profit transfers.

33. Plaintiffs and all subscribers, united by a mutual interest in the Exchanges’ successful performance, have the right to initiate claims against those accountable for misconduct, including instances of fiduciary breaches and mismanagement. Especially when Defendants are not only fiduciaries but also part of the Exchanges’ management (as more fully outlined below), the collective stakeholders of the Exchange, the subscribers, occupy a unique position that empowers them to hold the attorney-in-fact accountable for any fiduciary duty breaches and financial mismanagement.

34. Plaintiffs bring this class-action lawsuit to address the harms caused by the Defendants’ breaches of fiduciary duties, to recover excessive fees, to retrieve all benefits Defendants improperly obtained, and to receive any additional equitable or remedial relief deemed appropriate by the Court, including injunctive relief. Unless the owners—Plaintiffs and all subscribers—can remedy Defendants’ breaches and have them abide by their fiduciary duties, their only other option is to abandon their ownership interests in the Exchanges as Defendants’ illegal conduct will continue unabated.

(First Amended Complaint (“FAC”), ¶¶ 1-34, emphasis in original, underlining of case name added.)

Here, Defendants move for judgment on the pleadings and to strike Plaintiffs’ request for punitive damages.

“A motion for judgment on the pleadings has the same function as a general demurrer but is made after the time for demurrer has expired.” (Edmon & Karnow, Cal. Practice Guide: Civ. Procedure Before Trial (The Rutter Group June 2023 Update) ¶ 7:275.) Generally, “the rules governing demurrers apply.” (Ibid.)

The FAC contains a single cause of action for breach of fiduciary duty. The allegations state:

182. Plaintiffs re-allege and incorporate by reference each of the preceding paragraphs as though fully set forth herein.

183. Plaintiffs bring this fiduciary duty claim on behalf of themselves and the Class against the Defendants, who acted as attorneys-in-fact for the Farmers Insurance Exchange, Fire Insurance Exchange, and Truck Insurance Exchange.

184. Defendants owed a fiduciary duty to Plaintiffs and subscribers to act in good faith, in their best interests, and with the same care as an ordinary person in a similar position would use under similar circumstances, and in accordance with California law.

185. Defendants failed to fulfill this duty, acting at times to benefit themselves or their parent corporation, Zurich, to the detriment of Plaintiffs and subscribers.

186. Each Defendant acted at times to benefit, at least in part and to a material degree, itself or its parent corporation, creating a conflict of interest.

187. Each Defendant breached its fiduciary duties of care and loyalty to its respective Plaintiff(s) and subscribers by engaging in these actions:

a. Taking excessive compensation, which allowed them to improperly extract billions of dollars from the Plaintiffs’ and subscribers’ paid-in premiums;

b. Using criteria that were not disclosed to or approved by Plaintiffs and subscribers to award themselves excessive compensation;

c. Abusing their powers as attorneys-in-fact to gain an unfair advantage and excessive compensation for themselves at the expense of Plaintiffs and subscribers;

d. Failing to provide Plaintiffs and subscribers with information about the management fees collected, including the total profits earned and the compensation received with a 100% profit margin baked in;

e. Taking actions to increase the subscriber base and premium base when there was no need or benefit to the subscribers;

f. Running their Exchange to benefit FGI or Zurich and its shareholders, instead of the owners of the Exchange, the subscribers;

g. Failing to disclose their conflicting fiduciary obligations owed to Zurich and its shareholders and not putting in place safeguards to protect subscribers from Zurich's influence on the amount of management fees collected;

h. Collecting excessive management fees that wasted the premiums paid by Plaintiffs and subscribers; and

i. Refusing to stop their conduct and fulfill their fiduciary duties to Plaintiffs’ and subscribers.

188. These breaches of fiduciary duty were carried out with a conscious disregard of Plaintiffs’ and subscribers' rights and interests, and with oppression or malice, warranting the awarding of exemplary damages.

189. Defendants’ breaches are ongoing, and Defendants continue to falsely claim their actions are permitted by law. As such, Defendants will continue to breach their fiduciary duties unless their conduct is enjoined by Court order.

190. An injunction is appropriate because Plaintiffs and subscribers have no adequate remedy at law or otherwise for the harm or damage by Defendants because: (1) Defendants actions have rendered the exchanges financially unstable, with limited reserves and lower ratings from major rating agencies, thereby threatening their solvency; (2) subscribers in a reciprocal insurance arrangement purposely choose those with whom they associate making a move away from their chosen collective to another company an inadequate remedy; (3) an exodus of subscribers, now that Defendants’ unlawful scheme has been exposed, will lead to less diverse risk sharing, the sine qua non of a reciprocal insurance arrangement, that will undermine the very purpose of the reciprocal insurance arrangement and may ultimately lead to insolvency, and (4) given Defendants’ refusal to comply with their legal duties, an injunction is the only way for subscribers to force their attorneys-in-fact to comply with their fiduciary duties.

191. To remedy the harm and prevent further breaches, it is necessary to grant the equitable and injunctive relief sought, including disgorgement of profits, imposition of a constructive trust, and/or necessary corrective action.

192. Plaintiffs incurred the burden of retaining counsel to sue, protect their interests, and enforce important rights affecting the public interest. As such, they are entitled to recover their attorneys’ fees and costs under Code of Civil Procedure section 1021.5.

Defendants’ motion is based on four affirmative defenses. They claim the affirmative defenses bar Plaintiffs’ cause of action.

Defendants contend the contractual terms permit the attorney-in-fact fees. (See Motion, pp. 18-22.)

Plaintiffs assert that Defendants’ “fiduciary duties arise from agency law and [are] independent of the” contracts. (Opposition, p. 12; see also id. at pp. 13-17.)

Paragraph 79 states that two of the contracts authorize “attorney-in-fact fee[s] of 20% of the premiums subscribers pay,” and the third contract authorizes “attorney-in-fact fee[s] of 25% of the premiums subscribers pay[.]” (FAC, ¶ 79.)

The plain language of the contracts confirms paragraph 79. (See id. at Exs. A, C [stating that “there shall be paid to said Association, as compensation for its becoming and acting as attorney-in-fact, the membership fees and twenty per centum of the Premium Deposit for the insurance provided and twenty per centum of the premiums required for continuance thereof”]; see also id. at Ex. B [stating that “there shall be paid to said Association, as compensation for its becoming and acting as attorney-in-fact, the membership fees and twenty five per centum of the Premium Deposit for the insurance provided and twenty five per centum of the premiums required for continuance thereof”].)

Given paragraph 79 and the plain language of the contracts, Defendants contend the situation here is analogous to the situation in Chen v. PayPal, Inc. (2021) 61 Cal.App.5^th 559. Chen involved multiple claims and causes of action. The relevant fiduciary-duty cause of action is discussed on pages 575 through 577:

Section 1.1 of the user agreement states that PayPal is an agent of appellants with respect to custody of a user's funds: “PayPal is only a payment service provider. PayPal helps you make payments to and accept payments from third parties. PayPal is an independent contractor for all purposes, except that PayPal acts as your agent with respect to the custody of your funds.” As to that agency, the SAC alleges that PayPal owed appellants a fiduciary duty “to act with the utmost good faith and [in] the best interests” of appellants, but that it continuously breached that duty “by collecting for its own use,” pursuant to sections 5.1 and 5.2, “interest that is earned on pooled bank accounts solely containing funds belonging to its Users ....” The trial court correctly found these allegations fail to state a claim for breach of fiduciary duty.

“The existence and extent of the duties of the agent to the principal are determined by the terms of the agreement between the parties, interpreted in light of the circumstances under which it is made, except to the extent that fraud, duress, illegality, or the incapacity of one or both of the parties to the agreement modifies it or deprives it of legal effect.” [Citations.] Thus, where the agreement between an agent and the principal expressly authorizes the agent to engage in certain conduct, the agent's engagement in that conduct cannot constitute a breach of the agent's duty to the principal. Here, assuming the user agreement created an agency relationship giving rise to a fiduciary duty on behalf of PayPal with respect to the maintenance of pooled funds, the agreement expressly authorized PayPal to retain any interest earned on a user's funds while maintained in the Pooled Account. As appellants expressly agreed to assign interest on those pooled funds to PayPal, it cannot constitute a breach of PayPal's fiduciary duty to have retained that interest. Appellants provide no authority supporting the proposition that PayPal violated its duty to act in appellants’ best interest when they expressly gave PayPal approval to do the very act of which they now complain.

Appellants protest that in sustaining PayPal's demurrer to this cause of action, “the trial court simply stated that PayPal's ownership of the interest was authorized by the User Agreement,” which they claim “totally misses the point.” To the contrary, that is exactly the point: PayPal's duties as an agent are defined by the terms of the user agreement, and by having consented to the user agreement, which expressly assigns any interest on the pooled funds to PayPal, appellants cannot assert a cause of action for breach of fiduciary duty arising out of that practice. [Campbell v. Ebay, Inc. (N.D. Cal. Aug. 11, 2014, No. 13-CV-2362 YGR) 2014 WL 3950671] – the very case on which appellants themselves rely in claimed support of their breach of contract cause of action – reached the same conclusion. [Citation.]

Appellants attempt to frame PayPal's practice as “conversion” of their funds, to no avail. “ ‘Conversion is the wrongful exercise of dominion over the property of another.’ ” [Citations.] But “the law is well settled that there can be no conversion where an owner either expressly or impliedly assents to or ratifies the taking, use or disposition of his property.” [Citation.]

Appellants also argue, as they allege in the SAC, that the term of the user agreement assigning the interest to PayPal lacks consideration. They note that section 5.2 of the May 2012 user agreement states, “In consideration for your use of the PayPal Services, you irrevocably transfer and assign to PayPal any ownership right that you may have in any interest that may accrue on funds held in Pooled Accounts.” They argue, however, that as set forth in section 8.2 of the agreement, PayPal is otherwise compensated for the use of its services (2.9 percent of the sales value of each transaction plus an additional fixed charge of 30 cents), and “ ‘PayPal provides no extra services to its users, including [appellants], to justify taking ownership of the interest on the pooled funds that belong to its users ....’ ” They also submit that PayPal “dropped the pretense that PayPal was entitled to claim the interest on the pooled funds ‘in consideration for your use of PayPal services’ ” when it amended the user agreement and omitted the “in consideration” language from section 5.2. The flaws in the argument that the assignment-of-interest provision lacks consideration are at least twofold.

First, the question of whether a contract is supported by valid consideration is based on the overall exchange between the parties, not by looking at specific terms in isolation. “A single and undivided consideration may be bargained for and given as the agreed equivalent of one promise or of two promises or of many promises. The consideration is not rendered invalid by the fact that it is exchanged for more than one promise. If it could support each of the promises taken separately it is consideration for all of them.” [Citations.] Thus, PayPal's provision of online payment services may be consideration for appellants’ assignment of interest on pooled funds even if PayPal also received additional payment for their services. It is not for the court to second guess the sufficiency of that consideration. [Citation.]

Second, the SAC alleges that different users maintain different balances in their accounts such that accrued interest thus varies by account, and “such varying amounts of interest ... do[ ] not serve as consideration for any service provided by” PayPal. But again, appellants provide no authority to support their theory the different users are prohibited from agreeing to different consideration when they consent to the user agreement. That the use of PayPal's services is worth forgoing one amount of interest to one user and a different amount of interest to another does not render the interest-on-pooled-accounts provision devoid of consideration.

Plaintiffs claim Chen supports their position and is distinguishable. They contend it supports their position because it requires fiduciaries to use good faith in exercising authority granted under a contract. (See Opposition, pp. 14-15.) They contend it is distinguishable because the users had discretion to “avoid paying interest to PayPal by keeping their funds in their own accounts[.]” (Id. at p. 15.)

The Court disagrees. The “supporting” portion of Chen addresses a different section of the user agreement. (See Reply, pp. 9-10.) The “distinguishable” portion is not distinguishable. The Court of Appeal reasoned that, when an “agreement between an agent and the principal expressly authorizes the agent to engage in certain conduct, the agent's engagement in that conduct cannot constitute a breach of the agent's duty to the principal.” (Chen, supra, 61 Cal.App.5^th at 576.) Since the users “expressly agreed to assign interest on those pooled funds to PayPal, it [did not] constitute a breach of PayPal's fiduciary duty to have retained that interest.” (Ibid.) Plaintiffs allege similar facts here, so Chen is analogous and controlling.[1]

Plaintiffs seem to argue that Chen is inapplicable because Defendants sometimes took less than the contractual 20% or 25% fees. They contend the 20% and 25% fees are “invariable, fixed-percentage fee[s]” that cannot be varied. (Opposition, p. 4.) They claim taking less resulted in Defendants getting an “unauthorized” amount “without proper notice[.]” (Ibid.)

The Court disagrees. The theory of the case is that Defendants received excessive fees. Under Chen, they had a right to take the contractually permitted amounts. It “makes no sense” to claim Plaintiffs were harmed in instances where Defendants took less than the contracts allowed them to take, instances that probably benefited Plaintiffs. (Reply, p. 9; see also Motion, pp. 20-22.)

Nevertheless, the Court intends to deny the motion. “[L]ike a general demurrer, a motion for judgment on the pleadings ordinarily does not lie with respect to only part of a cause of action[.]” (Edmon & Karnow, supra, at ¶ 7:295.) Plaintiffs allege several fiduciary-duty breaches, not merely unreasonable fees. (See, e.g., FAC, ¶ 187(e)-(g) [alleging that each Defendant took “actions to increase the subscriber base and premium base when there was no need or benefit to the subscribers[,]” ran “their Exchange to benefit FGI or Zurich and its shareholders, instead of the owners of the Exchange, the subscribers[,]” and “[f]ail[ed] to disclose their conflicting fiduciary obligations owed to Zurich and its shareholders”].) While the Court agrees with Defendants’ position about the fees, they fail to show that the first affirmative defense covers the other alleged breaches. This necessitates denial.[2]

Notably, in remanding this case back to state court, the federal district court recognized that the case is about more than just fees and contractual obligations:

Finally, Defendants argue that Plaintiffs' claims do not solely relate to the Exchanges' internal affairs or governance because they arise from contract, not corporate law. [Citation.] According to Defendants, “Plaintiffs' claims are not about how Defendants perform their functions, but rather the amount Defendants collected to serve as Plaintiffs' attorneys-in-fact—compensation authorized by contracts between the parties.” [Citation.] However, Defendants' characterization is not an entirely accurate representation of Plaintiffs' claims. Plaintiffs' claims relate to whether Defendants acted in accordance with the fiduciary duties imposed upon the attorneys-in-fact when dealing with the Exchanges' surplus and whether they properly disclosed necessary facts to the subscribers. Defendants' relationship with the Exchanges is not only contractual but is also fiduciary. The fiduciary duties that Plaintiffs allege Defendants breached do not solely stem from the contracts between the parties, but rather arise out of agency law. The Plaintiffs claim that Defendants breached their fiduciary duty, not the subscription agreement, and the existence of a contract does not preclude a claim for breach of fiduciary duty that is related to a business's internal affairs.

(Lim v. Farmers Group, Inc. (C.D. Cal. Nov. 13, 2023, No. 2:23-cv-03419-ODW (SKx)) 2023 WL 7636874, at *6.)

Citing Tran v. Farmers Group, Inc. (2002) 104 Cal.App.4^th 1202, Defendants claim “the attorney-in-fact of a reciprocal exchange does not owe any fiduciary obligations beyond the limited, specific duties created by the subscription agreements.” (Motion, p. 22.) Defendants contend “Plaintiffs cannot state a viable cause of action” “[b]ecause . . . the fiduciary duties” they assert “exceeded the terms of those agreements[.]” (Ibid.)

Plaintiffs disagree. They contend Tran is distinguishable. (See Opposition, pp. 16-17.)

The Tran opinion opens with a “review [of] the basic organizational aspects of reciprocal insurers, also known as interinsurance exchanges[.]” (Tran, supra, 104 Cal.App.th at 1210.) The review is important here because “Farmers Insurance Exchange, Truck Insurance Exchange, and Fire Insurance Exchange are reciprocal insurers” (id. at 1207), and Defendants are attorneys-in-fact:

. . . An interinsurance exchange is an unincorporated business organization made up of subscribers and managed by an attorney-in-fact. The exchange is the insurer and the subscribers are the insureds. The subscribers execute powers of attorney appointing the attorney-in-fact to act on their behalf. The attorney-in-fact executes the exchange's insurance contracts. [Citations.]

The subscribers may provide for the exercise of their rights by a board composed of subscribers or their agents. [Citations.] “Courts which have considered the relationship between a reciprocal insurer's board, its attorney-in-fact and its subscribers have concluded the relationship is analogous to the relationship between the directors, management and participants in other kinds of organizations. For example, at least one court has held that ‘[t]he position of the attorney-in-fact of a reciprocal insurance exchange, who manages the business of the exchange under powers of attorney of the subscribers ... is fiduciary in character to the same extent as that of the management of an incorporated mutual insurance company ....’ [Citation.] Another court has observed that a reciprocal insurer's ‘basic differences from [a mutual insurance company] are in mechanics of operation and in legal theory, rather than in substance.’ [Citation.]” [Citation.]

The [Lee v. Interinsurance Exchange of the Automobile Club of Southern California (1996) 50 Cal.App.4^th 694] court rejected the argument that the fiduciary duties owed to subscribers by the boards and attorneys-in-fact of reciprocal insurers preclude application of the business judgment rule. This rule protects the good-faith business decisions of a business owner's management from judicial interference. The court noted the business judgment rule has been applied to limited partnerships, corporations, and mutual insurance companies, even though the managements of these forms of business are deemed to be agents and fiduciaries of limited partners, shareholders, and members. [Citation.]

After the review, the Tran opinion turns to the demurrer to the fiduciary-duty cause of action. This section is relevant because it announces the rules that govern here:

Respondents prevailed on their demurrer to Tran's cause of action for breach of fiduciary duty. A demurrer admits all properly pleaded material facts. If those facts support a cause of action under any valid theory, the complaint survives the demurrer. [Citation.] We review the sufficiency of the complaint de novo. [Citation.]

Tran raises a number of different bases for assigning fiduciary responsibilities to respondents. She claims the California Supreme Court has recognized the fiduciary duty owed by insurers to their insureds. Respondents were not Tran's insurers, but we address this claim because Tran's complaint includes allegations sufficient to state a claim that all defendants operated as a single enterprise. [Citation.] Respondents correctly note that California courts have refrained from characterizing the insurer-insured relationship as a fiduciary one.

Tran relies on dicta in Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 820, 169 Cal.Rptr. 691, 620 P.2d 141, and Frommoethelvdo v. Fire Ins. Exchange (1986) 42 Cal.3d 208, 215, 228 Cal.Rptr. 160, 721 P.2d 41. Recently, however, our Supreme Court declared: “The insurer-insured relationship ... is not a true ‘fiduciary relationship’ in the same sense as the relationship between trustee and beneficiary, or attorney and client. [Citation.] It is, rather, a relationship often characterized by unequal bargaining power [citation] in which the insured must depend on the good faith and performance of the insurer [citations]. This characteristic has led the courts to impose ‘special and heightened’ duties, but ‘[w]hile these “special” duties are akin to, and often resemble, duties which are also owed by fiduciaries, the fiduciary-like duties arise because of the unique nature of the insurance contract, not because the insurer is a fiduciary.’ [Citations.]” [Citations.]

We agree with the authorities suggesting that an insurer's breach of its “fiduciary-like duties” is adequately redressed by a claim for breach of the covenant of good faith and fair dealing implied in the insurance contract. [Citations.]

Tran also cites [Insurance Code] section 1733, which states: “All funds received by any person acting as insurance agent, broker, or solicitor ... as premium ... on or under any policy of insurance ... are received and held by that person in his or her fiduciary capacity. Any such person who diverts or appropriates those fiduciary funds to his or her own use is guilty of theft and punishable for theft as provided by law.” Tran's complaint includes allegations that respondents Farmers Group and Truck Underwriters Association, in their capacity as attorneys-in-fact for the exchange defendants, diverted some of her premium funds and issued her coverage in an amount less than she purchased from agent David Song.

However, even if we assume that the attorney-in-fact of a reciprocal insurer qualifies as an “insurance agent” [citation], section 1500 declares that Insurance Code provisions “regarding the appointment, licensing, qualification and regulation of insurance agents, brokers and solicitors, apply neither to the attorney-in-fact of a reciprocal or interinsurance exchange, nor to the salaried representatives of such exchange or attorney who receive no commissions, but do apply in the case of any agent, broker or solicitor of any reciprocal or interinsurance exchange who receives any commission.” Tran contends the attorney-in-fact receives a “commission” in the form of a percentage of the exchange's gross premiums. We think it is clear the statute contemplates commissions earned as personal income, not the fees charged by a corporate attorney-in-fact. Section 1500 precludes the imposition of a fiduciary duty on respondents under section 1733.

Tran identifies a third source of fiduciary obligation, however, that withstands scrutiny. Farmers Group or Truck Underwriters Association, or perhaps both, are her attorney-in-fact, and as such owe her a fiduciary duty in regard to the insurance contract or contracts they executed on her behalf. [Citations.] In [Delos v. Farmers Group, Inc. (1979) 93 Cal.App.3d 642], the court noted that both Farmers Group and Farmers Insurance Exchange had conceded their fiduciary duties by failing to respond to requests for admissions. However, the court also declared that Farmers Group, as attorney-in-fact for the plaintiffs, “owed them a fiduciary duty in reference to insurance matters involving the Exchange.” [Citation.] Respondents contend Delos is no longer good law. But the arguments and authority marshalled by respondents do not pertain to Delos's reasoning on Farmers Group's fiduciary duty as attorney-in-fact. They pertain to the holding on the Group's liability for breach of the implied covenant of good faith and fair dealing, which we discuss in Part 3, infra.

We believe respondents, having chosen to conduct their insurance business through interinsurance exchanges that require the appointment of attorneys-in-fact to execute contracts on behalf of subscriber/insureds, are bound by the ordinary rule that an attorney-in-fact is an agent owing a fiduciary duty to the principal. [Citations.]

Respondents contend their fiduciary duty runs not to individual subscribers, but to the exchange as a collective whole. Section 1305, however, clearly states that when the attorney-in-fact executes contracts, it is “acting for [the] subscribers under powers of attorney.” Nor does the authority cited by respondents support their position. In Lee v. Interinsurance Exchange . . . and [Industrial Indemnity Co. v. Golden State Co. (1953) 117 Cal.App.2d 519], the courts held that the attorneys-in-fact of a reciprocal exchange owe fiduciary duties to the subscribers analogous to the duties owed to shareholders by corporate management. Respondents' claim that the trustee of a trust owes a fiduciary duty to the trust itself but not to the beneficiaries is absurd. [Citation.] The business decisions made by the attorney-in-fact on behalf of the exchange are protected by the business judgment rule, but this does not absolve them of fiduciary responsibility to individual subscribers. [Citation.]

Respondents are on firmer ground when they argue that assigning fiduciary responsibilities to them would be inconsistent with the rule that the insurer-insured relationship is not a true fiduciary relationship. [Citation.] There is some tension between this argument and respondents' strenuous claim they are not insurers for purposes of liability for breach of the implied covenant of good faith and fair dealing. However, in light of the practical reality that attorneys-in-fact function as the management of reciprocal insurers [citation], we agree with respondents that the fiduciary duties flowing from their status should not be significantly disproportionate to the obligations owed by the management of other kinds of insurance organizations.

Appropriate guidelines for the scope of respondents' fiduciary duty can be drawn from the law governing powers of attorney and from the law of insurance. The scope of a power of attorney depends on the language of the instrument, which is strictly construed. [Citation.] The record in this case does not include the power of attorney executed by Tran. However, by statute the instrument must include the authority to execute the insurance contract on Tran's behalf. [Citation.] Tran has alleged that respondents mishandled the execution of her contract by issuing her less coverage than she requested. The evidence developed in the summary adjudication proceedings indicates that respondents issued no fewer than three policies to Tran after the fire, with differing terms. Clearly, these allegations and potential amended claims directly implicate respondents' fiduciary duties regarding the execution of the insurance contract.

Whether respondent's fiduciary obligations also extend to the adjustment of Tran's claim is yet to be determined. In Delos, [] the court deemed Farmers Group a fiduciary for purposes of all the Exchange's insurance business, because it was convinced that the Group exercised all the functions of an insurer, including control over claims processing. [Citation.] Here, respondents insist they have nothing to do with the claims functions of the exchanges. For purposes of the demurrer, Tran has sufficiently stated a cause of action for breach of fiduciary duty in regard to the execution of her policy. Respondents' fiduciary duty would extend to claims processing only if they assumed some responsibility for Tran's claim under the power of attorney executed by her.

Furthermore, because an attorney-in-fact's fiduciary obligations flow from its legal obligation under section 1305 to execute the insurance contract on behalf of the insured, and because the attorney-in-fact operates as the management of the exchange, we hold that its fiduciary duties can extend no further than the terms of the power of attorney and the contract of insurance. Thus, like the management of any other insurer, the attorney-in-fact is not subject to the strict principles of true fiduciary responsibility. [Citation.] The fiduciary duties arising from its status as attorney-in-fact for the insured are analogous to the “special and heightened” duties imposed on an insurer due to the “unique nature of the insurance contract.” [Citation.] The scope of an attorney-in-fact's fiduciary responsibilities depends in each case on the terms of the power of attorney and the nature of the functions performed by the attorney-in-fact on behalf of the insured.

We conclude that the facts stated by Tran in her complaint support a cause of action against respondents for breach of the fiduciary duty owed to the insured by the attorney-in-fact of a reciprocal insurer. The demurrer to the cause of action for breach of fiduciary duty must be overruled.

(Id. at 1211-1215, emphasis in original, underlining of case names added, footnote omitted.)

* “an attorney-in-fact is an agent owing a fiduciary duty to the principal” (id. at 1213);

* it applies to the attorney-in-fact’s execution of the insurance policy (see id. at 1214);

* it can “extend to claims processing” if the attorney-in-fact “assumes responsibility for the insured’s claim under a power of attorney executed by the insured” (Croskey, supra, at ¶ 11:166.7);

* but it cannot “extend [] further than the terms of the power of attorney and the contract of insurance” – i.e., “[t]he scope . . . depends in each case on the terms of the power of attorney and the nature of the functions performed by the attorney-in-fact on behalf of the insured.” (Tran, supra, 104 Cal.App.4^th at 1215; see also Croskey, supra, at ¶ 11:166.5.)

Considering these points, the Court finds that the motion should be denied. Defendants’ contracts state:

. . . subscriber hereby designates, constitutes and appoints Farmers Underwriters Association to be attorney-in-fact for subscriber, granting to it power to substitute another in its place, and in subscriber’s name, place and stead to do all things which the subscriber or subscribers might or could do severally or jointly with reference to all policies issued, including cancellation thereof, collection and receipt of all monies due the Exchange from whatever source and disbursement of all loss and expense payments, effect reinsurance and all other acts incidental to the management of the Exchange and the business of interinsurance; subscriber further agrees that there shall be paid to said Association, as compensation for its becoming and acting as attorney-in-fact, the membership fees and twenty per centum of the Premium Deposit for the insurance provided and twenty per centum of the premiums required for continuance thereof.

(FAC, Ex. A, emphasis added; see also id. at Ex. B [same language, except appointing Fire Underwriters Association and authorizing 25% fees]; id. at Ex. C [same language, except appointing Truck Underwriters Association].) Certainly, the bolded language authorizes Defendants to be paid the 20% and 25% fees. This wording renders the fees portion of the fiduciary-duty cause of action unavailing due to Plaintiffs’ failure to allege that Defendants ever received more than the authorized amounts. To repeat, though, Plaintiffs allege additional breaches. (See, e.g., FAC, ¶ 187(e)-(g).) Whether the italicized language encompasses those breaches is a factual question. The language is broad and ambiguous, and extrinsic evidence probably should be examined to interpret it. Consequently, for now, the Court rejects Defendants’ argument pursuant to the partial-demurrer rule because it does not dispose of the entire cause of action.

Defendants assert that Plaintiffs only allege economic injuries. (See Motion, p. 26; see also Reply, p. 14.)

Plaintiffs contend the economic-loss rule does not apply to fiduciary-duty claims. (See Opposition, pp. 24-25.)

“In general,” the economic-loss rule provides that “there is no recovery in tort for negligently inflicted ‘purely economic losses,’ meaning financial harm unaccompanied by physical or property damage.” (Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5^th 905, 922.) The rule does not bar “all tort claims for monetary losses between contractual parties[,]” “[b]ut such claims are barred when they arise from – or are not independent of – the parties’ underlying contracts.” (Id. at 923.)

The Court believes the motion should be denied. As noted in the first-affirmative-defense section, Plaintiffs allege multiple breaches, some of which do not appear to be fees-related. (See, e.g., FAC, ¶ 187(e)-(g).) Defendants fail to show that the economic-loss rule applies to those breaches. The motion needs to be denied since there does not appear to be a stipulation between the parties to set aside the partial-demurrer rule. (See Edmon & Karnow, supra, at ¶ 7:295.)

Defendants claim Plaintiffs lack “standing to challenge Defendants’ attorney-in-fact fees.” (Motion, p. 27.) They contend the real party in interest is the nonparty exchanges. (See id. at pp. 27-30 [discussing Oakland Raiders v. National Football League (2005) 131 Cal.App.4^th 621].)

Plaintiffs describe themselves as principals and Defendants as their agents. They assert that principals have standing to sue agents for breaches of fiduciary duty. (See Opposition, pp. 21-22.)

Plaintiffs also assert that they have standing because the contracts create duties owed directly to the subscribers. (See id. at pp. 22-24.)

In reply, Defendants contend Plaintiffs fail to allege harm to themselves in their capacity as subscribers. (See Reply, pp. 15-16.)

Defendants’ reliance on Oakland Raiders is unpersuasive at this stage. There, a football team brought a fiduciary-duty claim against its league, alleging that the league wrongfully diverted “revenues belonging to the [] member clubs to finance the creation and operation of” a new league. (Oakland Raiders, supra, 131 Cal.App.4^th at 651.) The Court of Appeal held that the team could not maintain the claim “because it was a derivative rather than a direct claim.” (Id. at 650; see also id. at 652 [determining that “‘the gravamen of the wrong alleged’ [citation] was the mismanagement of the [league] and the resultant diversion of its assets”].) Significantly, the Court of Appeal made the decision at the summary-judgment stage and found that no fiduciary relationship existed because the league is a voluntary, unincorporated association. (See id. at 635-636.) Defendants’ motion is a pleading motion, and, without a doubt, the insurance context is different than the team-league context.

Still, the Court agrees with Defendants’ reply argument. The harm alleged in the FAC is to the exchanges. Although attorneys-in-fact do owe fiduciary duties to insureds (see, e.g., Croskey, et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group August 2023 Update) ¶¶ 11:166.5-11:166.7 [identifying fiduciary duties owed by attorneys-in-fact]), the Court does not see allegations showing specific, individual harm that Plaintiffs suffered. (See, e.g., FAC, ¶¶ 182-192.) To qualify as the real parties in interest, Plaintiffs need to show actual harm to themselves related to at least one of the alleged breaches. (See Reply, pp. 15-16 [citing California authorities for the proposition that subscribers do not have interests in exchange assets, exchange surpluses, and undeclared dividends].) Potential, speculative harm is not enough.

Defendants contend Plaintiffs fail to allege malice, oppression, or fraud with particularity. (See Motion, pp. 30-31; see also Reply, p. 16.)

Plaintiffs claim a breach of fiduciary duty is tantamount to fraud, and they contend the allegations contain sufficient facts. (See Opposition, p. 25.)

Paragraph 188 states: “These breaches of fiduciary duty were carried out with a conscious disregard of Plaintiffs’ and subscribers' rights and interests, and with oppression or malice, warranting the awarding of exemplary damages.” (FAC, ¶ 188.) The allegation is conclusory.

That said, the Court favors denying the motion for three reasons. One, failure to allege malice, etc. with particularity is not a case-dispositive issue. Two, “[a] breach of fiduciary duty is considered fraud.” (Van de Kamp v. Bank of America (1988) 204 Cal.App.3d 819, 854.) Three, Defendants’ affirmative defenses – other than the fourth affirmative defense – fail to attack the entirety of the fiduciary-duty cause of action. If Plaintiffs amend to allege standing, some of the alleged breaches will survive. The better approach is to bring a motion for summary adjudication following discovery.

[1] Nothing in Chen indicates that the outcome hinged on the users’ purported option to “keep[] their funds in their own accounts” instead of in PayPal’s account. (Opposition, p. 15.)

[2] Absent a joint stipulation to override the partial-demurrer rule, the Court declines to treat Defendant’s motion as a motion to strike. (See Edmon & Karnow, supra, at ¶ 7:295.)